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Public Entities Pose Threats to Trade Secrets

When Evanston, Ill.-based Northfield Laboratories Inc. entered into agreements with the University of California?? 1/2 San Diego (UCSD) and San Diego County in 2003 to help test one of its pharmaceutical products, it never imagined that doing so would compromise its trade secrets.

The pharmaceutical company had invented a blood substitute called PolyHeme that it wanted to conduct clinical trials on. Northfield contracted the university to assist in the research while the county signed on as the patient-testing location.

But then the San Diego Reader got involved. The weekly paper began investigating allegations that Northfield was testing PolyHeme on comatose and unconscious patients. In conducting research for a story on the alleged practices, the paper filed a Public Records Act (the California state freedom of information law) request with UCSD and the county. UCSD handed over redacted versions of documents in April of 2005, concealing patient information and what Northfield considered trade secrets such as the procedures for shipping and handling the drug. Yet, the county released some similar documents in full, presumably because Northfield had failed to inform officials about what to withhold.

From here, things went downhill for Northfield. The lab had to scramble to stop the newspaper from publishing its proprietary information. Its situation highlights a dangerous downside to contracting with public entities.

"If you are going to enter into a relationship with a public entity, whether it be a county government or a university, you've got to take steps to ensure that records that are generated from that partnership are going to be protected from being released under the Public Records Act," says Thomas Burke, an IP partner at Davis Wright Tremaine.

Trade Secret Test

Unfortunately for Northfield, it didn't consider this drawback until it was almost too late. Because the Reader obtained its information legally, it seemed there was little the company could do to stop the paper from printing its trade secret information.

"Once the information has already been released by the public entity to the media outlet, the only option is to try to enjoin the media outlet from publishing," says Jennifer Seraphine, an IP partner at Jones Day. "Once the information is reported in the press, it no longer retains its secrecy."

Usually, a company in Northfield's situation would have to prove in court that the information it sought to protect was in fact a trade secret. In California, courts apply a three-part test to make this determination.

First, the information must actually be secret, meaning it isn't generally known to the public or competitors. In Northfield's case, if the Reader had already published information it received from the county, none of what was published could be considered trade secret.

Second, the information has to be a source of commercial value. Because Northfield conducted these tests so it could obtain FDA approval and eventually cash in on its unique formula, it met this criterion.

Third, and most importantly when engaging in a partnership with a public entity, the company has to have exercised reasonable efforts to preserve the secrecy of the information it claims is a trade secret.

"This last element explains why companies have to be vigilant, and why they almost have to seek protective orders against a newspaper publisher," says Gary Weiss, a partner at Orrick, Herrington & Sutcliffe. "Newspapers can say all they want about prior restraint, but an injunction to stop the disclosure before it is made is absolutely necessary."

Public Problems

And that is exactly what Northfield did. Realizing the county's disclosures threatened its livelihood, it laid down its trump card--a temporary restraining order. In December 2005, a superior court judge granted the order, which lasted until Jan.13.

"A temporary restraining order is an option, but it is not the answer because it only protects the information for a temporary period of time, which the court can extend," Seraphine says. "From a practical standpoint, it allows the two parties to negotiate to come to some agreement that they can both live with."

In the end, the Reader and Northfield negotiated a solution. The Reader could hold onto the county documents but agreed to not print any of the trade secrets.

Northfield was lucky. Experts warn that Northfield and other companies that contract with entities that are subject to freedom-of-information requests should take earlier precautions to prevent disclosure of proprietary information. First and foremost, companies should restrict what information public agencies have in their possession.

"They should only provide what is necessary because there is a risk that whatever is provided might ultimately be disclosed," Seraphine says.

If providing trade secret information is unavoidable, a company can try to establish a contract with the public agencies to ensure they don't release sensitive information. Still, the company needs to have constant involvement with any public agency in the event of a Public Records Act request.

"You may dot all the I's and cross all the T's in an agreement, but if you don't have someone from the company working with the public agency to make sure it doesn't release trade secret information, your agreement isn't worth the paper it is written on," Burke says.

Still, no contract is completely airtight. In the end, it is up to the courts to decide what truly is a trade secret despite what a company may claim.

"There's not a 100-percent way that you can protect your information except to not hand it over in the first place," Seraphine says. "Even when there's an agreement between the company and a public agency, the media outlet can sue, in which case the court ultimately will decide what should or should not be disclosed based upon the public interest."

Technology Editor

Keith Ecker

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